Options Greeks: The Vega By Kim Klaiman SteadyOptions.com

General Vega is the measurement of an option's sensitivity to changes in the volatility of the underlying asset. Vega represents the amount that an option contract's  price changes in reaction to a 1% change in the volatility of the underlying asset.  Vega changes when there are large price movements (increased volatility) in the underlying asset, and falls as the option approaches expiration. In simple terms, vega measures the risk of gain or loss resulting from changes in volatility.

Negative vs. positive vega Vega for all options is always a positive number because options increase in value when volatility increases and decrease in value when volatility declines. However, when position Vegas are generated, positive and negative signs appear. When you establish a position selling or buying an option, this will result in either a negative sign (for selling) or positive sign (for buying), and the position Vega will depend on net Vegas.

Vega Changes Vega is higher on options that have more distant expiration dates.   Options tend to be more expensive when volatility is higher. Thus, whenever volatility goes up, the price of the option goes up and when volatility drops, the price of the option will also fall.

Vega Risk Vega is one of the most important risk metrics an option trader relies upon. It is used to estimate the portfolio’s overall sensitivity to changes in implied volatility, one of the largest risks the option traders faces. For example, a trader with $1 million of vega knows he will make or lose $1m dollars for every 1% change in implied volatility. Often, a decline in IV (also known as vega risk) will offset the impact of price gains in the underlying stock.

Vega Impact On Options Strategies Short premium positions like Iron Condors or Butterflies will be negatively impacted by an increase in implied volatility, which generally occurs with downside market moves. Start vega negative positions with a slightly short delta bias and vega positive positions with long delta bias. Use vega positive strategies like calendars when IV is low and vega negative strategies like Iron Condors when IV is high.

List of vega positive strategies Long Call Long Put Long Straddle Long Strangle Long Calendar Spread Vertical Debit Spread

List of vega negative strategies Short Call Short Put Short Straddle Short Strangle Vertical Credit Spread Covered Call Write Covered Put Write Iron Condor Butterfly